Revenge of the Variable-Rate Commercial Debts

Most people in finance today cut their teeth in the era of Easy Money, when history books were thrown out the window. But that era is over.

By Wolf Richter. This is the transcript of my podcast on Saturday, June 24, THE WOLF STREET REPORT.

The good old Federal Reserve is now talking about hiking its policy interest rates toward 6%. Measures of underlying inflation have not come down in about seven months; what has come down a lot are energy prices; and they have pulled down overall inflation measures, such as the headline CPI. But core inflation and services inflation remain red hot.

In terms of the Fed’s policy interest rates, the top of the range is already 5.25%. The Fed is now talking about more rate hikes on top of that. There are not many people left in finance that were already decision-makers in finance last time the Fed was hiking rates in direction of 6% under the strain of red-hot inflation.

Most people in finance today cut their teeth during the period of Easy Money, when history books were thrown out the window and the new doctrine was established that the Fed’s policy interest rates would always be near 0%, and that inflation would never raise its ugly head again, and if the Fed were to hike rates again, it would do so only by a little and only briefly.

They learned this lesson – the wrong lesson, as it turned out – when the Fed timidly hiked its policy rates by 2.25 percentage points over a three-year period, from near 0% in December 2015 to 2.5% in December 2018, only to pivot months later and cut rates again.

By January 2020, so before the pandemic, rates were back at 1.75%, and by March 2020, they were back near 0%.

That was the only rate-hike experience for a lot of the decision-makers at institutional investors that are buying those securities. This includes banks, bond mutual funds, pension funds, etc. And other people that knew better years ago forgot about it by now.

People in finance today who were already decision-makers during the last major rate hike cycle from June 2004 through June 2006, when the Fed raised by four and a quarter percentage points, from 1% in June 2004 to 5.25% in June 2006, well, those people are now 45 and over. They should have known, they’ve been through a milder version of this. But they discarded that experience, for the new belief in the new era of permanently low interest rates and permanently low inflation.

And that hiking cycle from 2004 to 2006 occurred on much lower inflation than today: core CPI topped out at 3% in June 2006. And that hiking cycle progressed at a much slower pace than the current cycle.

There are not many people left who worked in finance when core CPI was 5% or higher, as it is today. There was a brief burst of that in 1990, and there was a lot of it in the early 1980s and before, but those people are now in their 60s and 70s.

Many of the hotshots in finance today cut their teeth when the doctrine was that inflation would never come back, and if it came back just a little, that the Fed could easily squash it, and that it would squash it, and that the Fed’s policy interest rates would nearly always be closer to 0%, and would only rise slowly and only a little bit, to maybe 2.5%, and only briefly, because market turmoil – such as the 20% dip in the S&P 500 in 2018 – would “force” the Fed to pivot.

This phenomenon, the belief in the new era where interest rates can never significantly rise again, has led to some truly interesting decision making over the past 15 years that is now causing all kinds of havoc after the Easy Money ended to the surprise of these people that knew that it would never and could never end.

This thinking that the Fed’s policy rates would always be close to 0%, and would top out at something like 2.5%, well, this thinking has now blown up four major banks: Silvergate CapitalSilicon Valley BankSignature Bank, and First Republic.

Decision makers at these banks had loaded up on pristine long-term Treasury securities and government-guaranteed mortgage-backed securities. But because they’re long-term securities, their prices fell when interest rates went up, and prices fell a lot, when interest rates rose a lot. This left the banks with huge potential losses – the so-called unrealized losses – on their balance sheets, and when big depositors figured this out, they yanked their uninsured deposits out, and the banks collapsed.

And this problem – based on decisions made a few years ago to load up on long-term securities when yields were really low – is still hammering a bunch of other banks.

This thinking that interest rates will never rise significantly, and that inflation will never rise, and will therefore never force the Fed’s hand, is now also blowing up Commercial Mortgage-Backed Securities (or CMBS).

These are mortgages that are secured by commercial buildings, such as office towers, shopping malls, apartment buildings, etc. These mortgages were sliced into different pieces, and often combined with other mortgages, and bundled into mortgage-backed securities, that were then sold to investors. So banks got rid of them; and the holders are now your bond mutual fund, pension funds, life insurers, publicly traded mortgage REITs, etc.

Because no one really expected interest rates and yields to shoot up this far, and this quickly, many of the underlying mortgages are variable-rate interest-only mortgages.

A variable-rate commercial mortgage means that the mortgage interest payment is going to go up with interest rates, based on a formula. And so over the past 15 months, these mortgage interest payments have doubled or more than doubled, and suddenly the already struggling rental income from office towers and shopping malls can no longer pay for the interest payments that have doubled.

At the same time, the market prices of these properties have plunged below and often far below loan value, and the landlords say, forget it, and they walk away and let the lenders, so the holders of the commercial mortgage-backed securities and other mortgage investors, have the properties. And these properties will have to be sold at huge losses for these lenders.

This started playing out last year, and is now coming into full bloom.

The landlord can just walk away since these are non-recourse loans, and all the lenders get is the collateral. The landlord only loses the money that they put into the building.

So that’s the problem with variable-rate commercial mortgages – no one expected those payments to double, and when they doubled the loans implode.

Variable-rate mortgages were very popular with investors – folks that never went through a period of big rate increases and big inflation, folks that thought that only small and brief rate increases would be possible.

The idea that the Fed’s policy interest rates would shoot up to over 5% and stay there for who knows how long didn’t apparently occur to them. And that landlords would see their mortgage payments double within a year, that apparently didn’t occur to them either. And that therefore, landlords would just walk away from the properties didn’t occur to them either.

But when rates were low, those variable-rate mortgages were great for landlords because they came with a lower interest rate. And when rates rise only a little bit, they’re great for investors.

By contrast, fixed-rate long-term debt falls in market price when rates rise. This was the problem that took down the banks.

But with variable-rate debt, the interest payments go up with interest rates, and so market prices tend not to fall when rates rise. So if short-term rates had risen only to 2.5% and stayed there for a few months, those investors would have looked like geniuses – making more interest income and maintaining the value of the securities. And they were counting on looking like geniuses.

But when short-term interest rates went over 5%, and the rates on those mortgages went to 7% or 8%, from 3%, then the borrower suddenly couldn’t or wouldn’t make the loan payment, and now those geniuses had a default on their hands, and instead of earning higher interest income, they’re earning zero interest income, and they’re stuck with the collateral that’s suddenly worth a lot less than the loan value.

Landlords were able to hedge some of their exposure to variable rates moving higher, but didn’t do enough of it because they too didn’t expect rates to rise by this much, and they didn’t expect for higher rates to last this long. Plus hedging can get expensive.

And a lot of these commercial mortgages are interest-only mortgages, with terms such as 10 years or shorter, and when the 3% mortgage comes due, it needs to be refinanced at 7%, while at the same time, the commercial property values have plunged. Landlords aren’t going to do that either, but instead, they say, forget it, and they’ll walk from the property.

Landlords – even the biggest landlords in the country – have already walked from numerous trophy properties, such as office towers from Manhattan to Houston, and from huge malls across the country, and from apartment buildings.

This is now playing out in real time across the country, and we discussed some of the biggest cases, some of the worst foreclosure sales, and some of the biggest losses on Wolf Street.

So far, this has hit investors, and not banks. Banks have apparently shed the riskiest loans, backed by the most overvalued properties. Eventually, they’ll get hit. But it seems the worst stuff out there has been shuffled off to investors.

This issue of higher interest rates that decision-makers had not envisioned and had not prepared for because they never expected that it could actually happen again, is now hammering overleveraged companies too.

These are junk-rated companies that have borrowed large amounts, usually in form of leveraged loans that have been sold off to investors, and you guessed it, these leveraged loans come with floating rates that go up with interest rates. Many of these companies were subject to leveraged buyouts by private equity firms, and were just loaded up with debt in the process. Interest payments were already a struggle before rates shot up. And now it’s getting really tough for them.

We have already seen bankruptcy filings by major companies through May jump to the highest level since 2010, though this is just the beginning.

All kinds of floating-rate debt is getting in trouble because neither the people in finance that worked on issuing that debt, nor the investors that bought this debt in its various forms, expected that interest rates would ever significantly rise again.

This belief that interest rates could never and would never significantly rise again has led institutional investors – bond funds, pension funds, life insurers, etc. – to chase after interest-only floating-rate debt.

These investors figured that floating-rate debt would protect them from a drop in value when the Fed hikes rates because the rate of floating-rate debt is pegged to Libor, or now SOFR. And when the Fed hikes, holders of floating-rate debt earn a higher interest payment, and the market value of the debt remains unscathed.

So that was the theory, based on the theory that inflation could not resurge, and that the Fed would not and could not hike rates to more than 2.5%, and that the Fed would be trapped, or whatever, if it hiked, and that it would have to pivot and cut rates before they go higher.

But that theory on inflation and the Fed’s rate hikes turned out to be just another bad theory, based only on the 15-year period of Easy Money, and not based on the period with actual big inflation and much higher rates. And because very few decision makers today worked in finance in the late 1970s and early 1980s, or even in 1990, and few of them were decision-makers in 2005, essentially no one was prepared for this.

This includes the policy makers at the Federal Reserve itself. They were not prepared, they blew it, they completely misjudged this inflation; they too thought that it would be just transitory or whatever, and go away on its own, and they kept telling the world still in early 2021 that the Fed would continue with its money-printing and would continue with its zero-percent interest rate policy at least until 2024. They totally blew it. Fed chair Jerome Powell is old enough to have seen first-hand the big inflation in the late 1970s and early 1980s, though he was just a young lawyer at the time, and he discarded any lessons he might have learned at the time.

Now they get it. But the damage is being done.

This 15-year period of Easy Money, of ultra-low interest rates and money printing, globally, will go down in history as one of the craziest periods ever – a period of consensual hallucination, a period when these goofballs imagined that the economy was immune to inflation and would never see higher interest rates again, and that unlimited wealth, instead of massive inflation, would somehow spring from money-printing and ultra-low cost of capital. This was the transcript of my original podcast on Saturday, June 24, THE WOLF STREET REPORT.

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  121 comments for “Revenge of the Variable-Rate Commercial Debts

  1. Adrian says:

    I know it sounds silly but why can’t there be a min lending rate that central banks can’t go below. Like 4%. Have ultra low rates ever ended well? The stimulus always favours the wealthy and the end result always seems to be a frenzy amongst the plebes that pushes up asset prices and results in destrIf economists know money can’t be free, why do they always try to make it work?

    • Jon says:

      It is not possible because the system is owned by rich and they would make policies to benefit them

    • Otto Maddox says:

      Yeah, more price controls!!

    • Dale says:

      The hilarious part is that PE and other low-IQ investors could have had fixed-rate loans. But they didn’t because they wanted to save 50 bps.

      Now that 50 bps will kill them.

  2. 2banana says:

    There is definitely a theme, repeated many times and throughout this essay, for those that don’t read the article before commenting.

    BTW, isn’t 60 the new 30?

    “There was a brief burst of that in 1990, and there was a lot of it in the early 1980s and before, but those people are now in their 60s and 70s.”

      • Ted T. says:

        Isn’t this the type of institutional knowledge that Finance professors and company executives are supposed to impart to young professionals? People laud Jamie Dimon for JPM’s “Bulletproof Balance sheet “, but not everyone can count on having a silver maned chief executive calling the shots. I used to take pride in passiig on the lessons learned over a long career but they seldom listened. Guess I answered my own question!

        • Juliab says:

          Great article

          No matter what they teach you in school, there is no better teacher than life.

          One has to be scalded to know that the stove is hot and should not touch it.

          Young people must learn to live according to their means and not for the moment

        • Brian says:

          If you have kids, you know first hand: The young often insist on learning things the hard way no matter how hard we “old” (read: stupid, out-of-date) try to teach them.

        • Cas127 says:

          It might not be just historical ignorance…your average coked-up NYC money-runner/”Master of the Universe” can’t simply do “nothing” (put money into safe, zero yielding investments during the long night of ZIRP).

          Despite the Fed murdering the orchestra, most money runners feel they “gotta dance”…so they knowingly take stupid risks to justify their cut.

          Plus, it is better to fail collectively than succeed by standing out…so bottomless trillions get/got poured into ZIRP’ed fixed income/idiot equities rather than maybe some new structure/alternatives/real assets (although the ZIRP everything bubble tended to poison everything with overvaluation).

  3. Gary Fredrickson says:

    The new Commercial Real Estate loans need to be made with full recourse to prevent the “walking away” and socializing the losses.

    The Federal Reserve’s “Bank Term Funding Program” that gives liquidity to banks has the perfect requirement: “Recourse: Advances made under the Program are made with recourse beyond the pledged collateral to the eligible borrower.” Source Federal Reserve website.

    • David S says:

      The losses are not socialized. They are privately born by the private institutions that bought the loans.

  4. 2banana says:

    Soul crushing inflation and higher and higher interest rates, that goes on for years, is something most Americans have no experience with.

    The 70s gave the middle class:
    Hamburger Helper to stretch the cheapest of meats
    Generic Beer
    Trying to hoard ever dime to save
    Total avoidance of debt

    • MoreCreativeMatt says:

      The 55-mph speed limit… Odd/even gas rationing… the Susan B. Anthony dollar… the metric system…

      • JimL says:

        TBF, $1 coins and the metric system make a ton of rational sense. Heck, with a bit more inflation, $5 coins might make sense as well.

    • Mad Puppy says:

      Ya, disco- Staying Alive ((Bee Gees). Who knew they were so insightful!

  5. Happy Jack says:

    This should be required reading by anyone studying finance in University on down ….

    • Timothy J McLean says:

      Agreed. I forwarded the article to two of my younger teammates, who have only seen rates in the 3’s and 4’s.

  6. Brant Lee says:

    Still yet, investors are looking for the fast buck. They going nuts on Artificial Intelligence as we speak. It’s not about value, it’s all about timing the boom and bust.

    • James Levy says:

      Caused by the confusion between the value of the company and the value of the stock. This has been a growing issue for decades.

    • jon says:

      But investors have been handsomely rewarded for last decade or so by doing BTFD.

      People who doubted FED ( .e. FED works for elite ) have been proven loser.

      Don’t go by the explicit mandate, go by what the people in Power are doing.

  7. Ross says:

    I just talked to a contractor about insulation. He told me he’d just pulled out some newspaper from inside a houses wall. He said there was a full page ad from a bank with MORTAGE RATES BELOW 9%!

    My parents were happy with an 8 after that. Oh how soon we forget. Unlearned lessons of history repeats itself and all that.

    • Robert Hughes says:

      Try 16.25. I know been there. Debt free now for many years. Lesson learned.

  8. Not Wolf says:

    Thank you. Being hearing impaired means that podcasts don’t exist to me.

  9. Sams says:

    Was landlords and other borrowers really dumb, or was they cynical? The point is that when they can walk away, they may even do so with money already “earned”. Or at least money pilfered and either stuffed away somwhere or spent on having a good time.

    I would not be surprised that quite some of them that now walk away from the assets and debt made money on the transactions.

  10. Micheal Engel says:

    23 bank passed the stress test. It was done before SVB bank collapse and
    Fed hikes.

  11. James Levy says:

    The thing is, for much of the period you excoriate that “printed” money was hoovered up by the top 5%, and thus the velocity of that money was low. The money supply increased dramatically, but it was not widely distributed and mostly used to fuel asset bubbles and purchase luxury goods (multiple homes, private jets, mega-yachts). When that money started to “escape”, and get spent the effects added to an inflation that was already in the making as production was ratcheted down dramatically and supply chains were disrupted by COVID. Powell and his apparatchiks were sure that the magic market would self-correct, but they were wrong, and thus we are in the situation we are in today.

    • RH says:

      True that, but given the volume of money printing that started in 2019_and the baby boomers’ foreseeable, mass retirements, inflation was the inevitable result of the reckless bankers’ gambling and money creation through their cartel: their “Federal” (actually privately owned) “Reserve.” I presume the reserve term refers to their “Fed’s role as an endless source of way below FMV, ultra low interest loans and bail outs to the bankers and ultra rich who control it by paying its appointed, ” Fed” leaders $200,000 to $400,000 per speech for bailouts in their “retirements.”

  12. William Leake says:

    Isn’t it always “the new normal”, for the main stream media pundits and other idiots? And over time, things return to the old normal (the real normal) and they wonder what happened. In statistics, norm is just another word for average. From 1971 to 2022, average Fed funds rate was 4.86%, just a bit below today’s. The 30 year fixed mortgage rate was 7.76%, a hundred basis points higher than today’s 6.75%. Sure there is a lot of variability in those series, but I am talking about the norm, the average. Now the average Core CPI was 3.90% (Total CPI was 4.01%). So the current Fed funds rate and the current 30 year fixed mortgage rate are unlikely to have much impact on slowing the economy sufficiently to reach an inflation target of 2%, based on averages over the last fifty years. This is a very simple analysis, but I will go with it. Much higher, much longer.

    • Jcohn says:

      I recently asked my daughter to ask Chatgp
      and Googles in house AI to predict how high rates would go . Both refused to do so although one stated that rates could go to 7%.
      I hate to tell stock market and real estate investors what that rate would do to the markets. , but I will give them a hint -CRASH
      And 7% is only 1.5% above 6 month Tbills

      • CCCB says:

        JC, Ive been saying 7% fed funds here for a while and getting grief for it. I noticed for the first time, Wolf mentioned 6%. Maybe I’ll have to raise my number to 8% now.

        WL just gave us some long term averages that show 5.5% isnt going to do much besides tank the very worst of the 3% commercial loans and a few zombie companies.

        When the big ugly recession hits – and it will once everyone is convinced we’ve made a soft landing (theyre already starting) – we’ll finally get the deflation in housing so many people have been praying and hoping for, but they wont like it a bit. Depression is hard on everyone except the cash rich who can pick up bargains.

        Forget those that can’t remember 1980’s. I do and Texas and the country was a disaster. Most can’t even remeber the total destruction of 2008 when real estate imploded. Theyre actually rooting for it to happen again!

    • djreef says:

      The rich control the media, thereby controlling the narrative. Why would we be celebrating a ‘new bull market’ against the backdrop of rapidly slowing world demand?

    • William Leake says:

      A little more support for my simple analysis today. First quarter GDP was revised up to 2.0% from 1.3%. The economy is not going to slow by throwing normal interest rates at it. Much higher, much longer.

  13. DownFed says:

    “they too thought that it would be just transitory or whatever”

    I don’t buy that. They were saying that in 2021, when the government planned to run a $2.7 trillion deficit. I don’t think for one second that the government would, or could run a deficit of that magnitude without the Fed agreeing to monetize debt so that interest rates wouldn’t go through the roof. Powell testified that he monetized $1.5 trillion in debt (government debt and mortgages) in 2021.

    So, the Fed had two choices in their explanations, either inflation was transitory, or fighting inflation was subordinate to monetizing debt because the Fed policy is fiscal dominance.

    That’s why I think we heard this transitory talk, because otherwise, the charade that the Fed is independent would be over. The fiscal side was applying stimulus, and any jump in interest rates would have counteracted that.

  14. ANDY MELNICK says:

    I started on Wall Street January 2, 1970. Therefore, high inflation and interest rates are not new to me. Back then, I put half a college tuition away each year to save for my daughter’s college education. In1982, I bought a stripped treasury at I think it was at 18% interest. I still have the confirm at home. At the time of the investment, private college tuition was $15,000 so I invested $7500 and roughly 15 years later it would be worth around $75,000. When I saw what the payout would be it implied that college tuition in the mid-90’s would be $150,000. When I saw that, I knew inflation had to break.

    • Resjudicata says:

      “Therefore” is sophomoric. Wall Street people should be more eloquent Like “as such”

      • 91B20 1stCav (AUS) says:

        ‘barrow boys’ expected to be ‘eloquent’ (even if clad in Armani…)?

        may we all find a better day.

  15. Micheal Engel says:

    AAPL is galloping to $3T @191. NDX breached Mar 2022 high, slightly below the peak and is backing up. Either a bungee plunge, or a sling shot above Nov 2021 high to a 23Y resistance line coming from Mar 2000 to Nov 2021 high. What will JP do.

    • old school says:

      Enron temporarily had largest market cap and GE was on top for a while. You always have the curse of large numbers that your growth rate is going to trend lower and lower once you are a well run giant. If you are poorly run you fall to zero or close to it.

      • MoreCreativeMatt says:

        Enron never had the largest market cap; I don’t think it ever got above $100 billion. Cisco did have it for about a week at the top of the dotcom bubble. Exxon has had it three or four times and it wouldn’t surprise me at all if it did it again in a couple years. (Long XOM)

  16. BENW says:

    Would love to see a lot more bankruptcies across a wide range of industries.

    I saw an article with some bigwig like Zandi talk about how inflation has fallen to 4% which is above the Fed’s 2% target.

    It’s no wonder we’re in such a mess when someone that supposed to be a guru equates headline CPI top the Fed’s core CPI target which is running at 5.39% and not 4%.

    It’s just a bunch of village idi0ts, if you know what I mean.

  17. Nathan Dumbrowski says:

    What is to keep the landlords from raising rates? Just passing the buck along as inflation gone wild?

    Everything else seems to have gone higher in every corner of the country. Car, insurance, gas, food, travel, vacation, repairs, project…

    • BP says:

      They’ll keep trying. Rent control in California is 5% a year plus annual CPI capped at 10% total, so the people at the bottom will always have high inflation, year after year. We need people in government to look out for the people at the bottom, not work for those at the top.

      • jon says:

        The Govt and FED ( FED is part of Govt if you have not yet realized yet ) works for the people who fund them ( in this case political parties/ both side ). FED won’t do anything that would bring pains to elite and thus their masters.

        People get carried away by the FED explicit mandate and to explicit fact that FED is independent.

        FED is not at all independent and does not work for the common people.

        FED is forced to hike to be compliant with their so called mandate as even the manipulated govt metric is showing inflation too high.

        The real inflation on the ground is much much higher. It is so high that it is showing up as high even in govt manipulated metric.

        People in general are comatose. Most of them have no clue why and how inflation happens and they have not even heard about FED.

        Point in case, Edrogan in Turkey got re -elected even though inflation has been running there at 80% or so in last 2 years or so.

        • Resjudicata says:

          The fed is a status quo machine. It’s not for big buis, or commoners particularly. It cares about common people when their problems might sink the ship. The rest of the time it cares about big business and gov (can’t have a depression and let the Chinese get ahead of us)

        • Resjudicata says:

          Cpi is a pitchfork gauge. Nothing more.

        • MM says:

          big buis ?

        • Flea says:


    • Wolf Richter says:

      “What is to keep the landlords from raising rates?”

      Sky-high office vacancy rates. They’re over 30% in a bunch of big cities, including Dallas, Houston, and San Francisco. Landlords have to cut rates to fill their spaces. The office market has been way overbuilt, nationally.

  18. Joancohn says:

    My question for everyone is “ why are long term rates so low .”
    They are very low when compared to inflation
    They are very low when compared to rates out to 18 months
    They are very low compared to mortgage rates.

    I understand that the Fed policy is QT but the Fed is not replacing bonds that are maturing and not selling any of its long term bonds that it bought in recent years, so the Fed has NOT been a seller of long term bonds .
    I also understand that longer term inflation protected bonds reflect an inflation rate of 2.7-2.8%. But did not the Fed go on a buying binge of Tips a few years ago , so this expected inflation rate is subject to manipulation .

    • elbowwilham says:

      Because LT treasuries are still considered the safest asset and there are enough buyers who are looking for safety to keep the rates low. Basically they think we are in for some real economic hardship and do not want to exposed to risk.

  19. Random Intime says:

    At this point whatever Fed does, I don’t think stock market, housing market care. Both are going back to crazy times. Not sure how people are able to afford homes right now.

  20. Debt-Free-Bubba says:

    “will go down in history as one of the craziest periods ever – a period of consensual hallucination,”
    To a sane person yes it will but the ones that caused this mess will give themselves a prize and may very well try and do it again. Or come up with something even stupider like Japan seems to be doing…

  21. One and a Penalty says:

    15 years of cheap, easy capital (and free $ directly handed out during the pandemic), artificially inflated asset prices by investors chasing yield. This is especially true with CRE. It may take years for the markets to realize the true value of these assets with a lot of pain along the way.

  22. Frank says:

    The challenge in many industries is that if one does not run with the herd, and chooses not to play the game, they more than likely lose (unless they know when the market will turn on them).

  23. spencer says:

    The “15-year period of Easy Money” was made possible by the payment of interest on interbank demand deposits, on bank reserves. And this was perverse as it lowered the real rate of interest for saver-holders.
    It shifted asset preferences.

    Based on LSAPs, this suppression of interest rates reduced the demand for loan funds (taking governments off the market), while increasing the supply of loan funds (debt monetization).

    This policy was the obverse of the flow of funds during the U.S. Golden Age of Capitalism where private savings were expeditiously activated and put back to work in largely real investment outlets.

    • ru82 says:

      I still cannot comprehend Negative Interest Rates in Europe a few years ago. I thought Negative rates would be impossible but it was not.

      • Jon says:

        Don’t be surprised
        Negative rates can come to usa as well in the future

      • Juliab says:

        The ECB’s idea was to get money out of the banks and encourage investment.

        It was a stupid idea but still the BCE didn’t make the mistake of the FED to throw wads of money at every individual and just give the money to the banks to distribute it.

        So now the European qt is ahead of the Fed

  24. Augustus Frost says:

    “This 15-year period of Easy Money, of ultra-low interest rates and money printing, globally, will go down in history as one of the craziest periods ever –”

    No, not one of, THE biggest asset, credit, and debt mania in the history of human civilization. And it’s not just the last 15 years either, it’s now over 25.

    The article also didn’t cover debt outside the US which along with US corporate debt, is probably the “canary in the coalmine”.

    Despite higher rates, financial conditions are still very loose and it’s entirely due to market psychology. It’s the same psychology described in this article where lenders are still willing to underwrite sub-basement quality debtors, the worst ever.

    • LongtimeLurker says:

      Most money outside America will get effectively destroyed when the debts are paid off.

      • CCCB says:

        Foreign debt is never paid off. It only increases. Every time economies slow down, loans are modified and extended at ever higher interest rates.

        Just look at China’s loans to Africa right now, or the US and latin america decades ago.

      • Sams says:

        Or when the loans are defaulted uppon…

  25. Prince says:

    This period also made government to pour money on people at every problem.
    The population is now addict and it is a very easy way for our politicians to solve problems.

    I am sure that once governments will need to limit deficit spending Fed’s critics will become really agressive.

  26. TR says:

    “A sucker’s born every minute.”
    “A fool & his money are soon parted.”
    “You can’t always get what you want but sometimes you get what you need[deserve].”

    Can anyone else add to this list? ;-)

    • Debt-Free-Bubba says:

      Howdy TR
      A penny saved is a penny earned. Probably unrelated but this is what came into my brain, so I typed it……

      • Sams says:

        A penny saved is quickly worthless due to high inflation.
        Some modificatin have to be done to the penny saved, penny earned today…

        • 91B20 1stCav (AUS) says:

          …in for that penny, in for a pound…

          may we all find a better day.

    • MM says:

      You get what you pay for. Don’t be penny-wise and pound-foolish.

    • Bengt Løyer says:

      “The investment advisor with the perfect record will fail as soon as you act on his recommendations” (Harry Browne)
      “the stonks you have go down, the ones you don’t have go up”
      “prices go up when there are more idiots around than stocks, they go down when there are more stocks available than idiots”
      (the last 2: Andre Kostolany)

    • VintageVNvet says:

      A fool who persists in their folly becomes wise?
      Look before you leap?
      Measure twice, cut once?
      Dulce et decorum est pro patria morii?

    • Volvo P-1800 says:

      “A fool and his money are soon parted.”

      Hm. That would mean there is a shortage of stupid rich people …

    • Slick Willy says:

      There is no such thing as a free lunch

  27. Micheal Engel says:

    The BRICS are 70/80 nations. They fight the elite. The Fed fight back
    by raising rates.

  28. RickV says:

    As always, a very good summary of current financial events. I saw interest rates go to 18% in the early 80s that bankrupt the real estate developer I worked for. And in 1990 I saw the adjustable rate home loans issued by the S&L I worked for cause it to be taken over by the RTC and dissolved. Why don’t people learn? Another nasty lesson will have to be learned. We are going to watch the manifestations of this credit crisis evolve over the coming weeks, months, years.

  29. Micheal Engel says:

    1) The 15 years of easy money started in Oct 2008 when congress hurried
    the Financial Service Regulatory “Relief” Act of 2006.
    2) Your money saved the banks in Oct 2008.
    3) Your money empowered the Fed that suppressed mortgage, bills, notes and bond rates.
    4) It was your money in a system control with a positive feedback loop that built the money tsunami in 2020 when the economy was comatose.
    5) Easy money, no printing ==> your money for a hollowed IOU.

  30. Sporkfed says:

    Bernanke got a Nobel prize for can kicking with
    his decision to punish savers. Rest assured,
    Powell will protect the banks.

    • Wolf Richter says:

      He got the Nobel Price for his research on the Great Depression.

      • Softtail Rider says:

        I’m lazy and a poor typist so copied this partial paragraph from above.

        Measures of underlying inflation have not come down in about seven months; what has come down a lot are energy prices; and they have pulled down overall inflation measures, such as the headline CPI. But core inflation and services inflation remain red hot.

        Question one is have you given any thought of energy prices rising this summer?

        Past thoughts and articles say crude inventory will begin falling until the end of driving season. This should cause the price to rise, as it usually does each year. That along with the previous year’s sale of the SPR helps my thinking.

        My SSA paycheck increase is helped by inflation. So my thoughts, “Are we looking at another huge increase in October?”

        Just playing the devil’s advocate.

        • Wolf Richter says:

          1. I don’t predict/forecast energy prices. They can go whacko in a New York minute in any direction.

          2. Your SSA cola depends on the average annual CPI-W in July, August, and September. I will discuss it when we get there. But it’s going to be lower than last year because energy prices have plunged, and CPI-W is not a core measure — so it includes the plunged energy prices. For May, annual CPI-W was 3.6%. Based on what we already know, I think CPI-W will be higher than 3.6% in Jul, Aug, and Sep, but it won’t be juicy like it was last year.

        • DownFed says:

          They are still draining the SPR. There is a chart that updates weekly – showing 348,617 thousand barrels. Last time we were that low was 2nd half 1983.

      • ru82 says:

        To bad Bernanke was not around during the Great Depression. It may have only lasted 2 or 3 quarters instead of about 10 years. LOL

        • Swamp Creature says:


          I’m glad he wasn’t

          If Bernanke were around during the Great Depression, we would have been in a Weimer style Hyperinflation followed by a collapse of the civil society.

      • John H. says:

        Fed solutions (money printing) seem always destined to lead to the Fed painted into today’s dilemma:

        -Raise rates and start the next Great Depression.
        -Lower rates and destroy working class through debasement.

        This is THE legacy of central banking and managed money.

        Time to “rethink and shrink” the Fed (despite Bernanke’s Nobel-winning analysis)

      • Sporkfed says:

        His research on the Great Depression seems to support
        his actions as Fed chairman.
        “ If Bernanke’s findings are correct, then policymakers were right to implement some of the most controversial policies of the financial crisis, including efforts to rescue the big banks and re-start credit markets. By bringing the panic under control relatively quickly, those policies prevented a still deeper and more protracted recession.”

    • spencer says:

      Yeah, Bankrupt-u-Bernanke “did it again”.

    • Sams says:

      Check out that “Nobel” price Bernanke got. It was not a Nobel price, it was a central bank price.

  31. OutWest says:

    I can only speak for myself but it certainly is starting to look more and more like a slow-motion train wreck. Reminiscent of those years just after 2008….
    Glad to be living a quiet, debt-free lifestyle these days.

    • Debt-Free-Bubba says:

      Howdy OW Same here partner. Living within your means is a great life. Governments seem to be papering over everything or (kick that can) so to speak. Which generation reaps the reward and which one pays the price, and how long can the golden goose produce??? More funner watching debt free and happy….

  32. Bengt Løyer says:

    Of course stonks always go up. They go up when interest rates are lowered, and they go up again when interest rates are hiked, in the expectation of a hike reversal.

    • Wolf Richter says:

      Seems you missed it. Stonks — the major indices — are down from the peaks since the rate hikes started: Nasdaq -16% since Nov 2021; S&P 500 -9% since Jan 2022.

  33. Mike R. says:

    The Fed will NOT be raising interest rates above current levels. The economy is markedly slowing and they know this. Powell is essentially telling everyone that rates are NOT going down anytime soon.

    Most people were ignorant (or in denial) of the building rage against the US and dollar around the globe. The Ukraine war and the US’s response moved the needle in a step change further against the US.

    We are living in unprecedented times with respect to “wealth” and potential massive wealth destruction. Buckle up.

  34. Aaron says:

    This is a world created by Hermes. The gods have abandoned us all. Simply for this state to exist… The gods have abandoned us all.

    • VintageVNvet says:

      NO,,, The Great Spirits AKA Gods or whatever YOU want to call/name them NEVER have and NEVER will ”abandon” WE the People/Peons…
      The clear fact is that WE, in this case the WE of the World,,, have abandoned THEM…
      Try your best to reconnect IF you feel abandoned,,, and:
      FAR DAMN SHORE,,, YOU,,, and only YOU MUST do the work to do so…
      MANY ”Venues” currently available and helpful for many of us,,, but,,, in any case, WE must do the work to get there…

  35. WB says:

    Very good summary of the present situation. I’ve worked in finance for over forty years. Finance is ruled by the herd mentality, by the fear of missing out, by the idea that whatever is happening now will continue to happen forever. Time and again, I have seen people who made disastrous investment decisions rise to the top of large financial companies, thus confirming the truth of Keynes’ observation that it is better to fail conventionally than to succeed unconventionally.

  36. Einhal says:

    May be a silly question, but for those who are buying treasury bills, are you buying them with Treasury Direct or through your brokerage? I logged onto my Treasury Direct account, and I really don’t like the way you have to do it through the “auction,” meaning you don’t know what you’re going to get.

    Any downside to using a brokeage?

    • VintageVNvet says:

      TD ein,,
      otherwise, seems to require ”fee(s)” from every broker such as you suggest…
      not at all sure of this because only pinged a couple

  37. Harvey Mushman says:

    I started off with Treasury Direct. Then I found out I could buy them through Fidelity. They both work fine for me. You can’t buy I-bonds thru your brokerage, only Treasury Direct.

    • Harvey Mushman says:

      Oh my post was meant for @Einhal

    • Einhal says:

      Thanks. How do you get yourself comfortable that some crazy event won’t happen that you’ll end up buying it at a yield much less than you want?

      • Harvey Mushman says:

        I have been buying 13 week, 17 week, and 26 week T-Bills, nothing long term.

        • Einhal says:

          Thank you. How many days before the auction do you click to purchase?

        • Harvey Mushman says:


          When a T-Bill matures, I just renew it. I don’t pay attention to the auction date. The interest rate variations will average out. ( or that’s my theory anyways :-) )

  38. The Real Tony says:

    I’ve been putting everything into the longest term bonds, longest term strip bonds and longest term corporate bonds possible knowing the Fed funds rate will drop to around 1.75 percent at the start of 2026. I’ve got corporate bonds out as far as 2076 that will have to be sold when I die unless I live to 117 years old. I’ve got a boatload of money coming due at the very start of next year and all of its is going into the same thing the longest term bonds possible.

  39. Volvo P-1800 says:

    “This belief that interest rates could never and would never significantly rise again …” The thinking in my country (Sweden) was “safety in numbers” – that the Riksbank would never be able to raise rates because too many people borrowed too much money. Guess what? The Riksbank raised its rate today, again. I know you guys say “don’t fight the Fed”. Nor should you try to extort the Riksbank.

  40. El Katz says:

    While I was waiting for spousal unit to have some tests done, I wandered into Scottsdale’s “Fashion Square”. I have no idea what the mall owner is/ are thinking, but an entire wing of the mall is being remodeled – and not with inexpensive materials. The mall was jammed with people spending freely in the designer stores.

    If one were dropped in there without reading about the present status of CRE, you’d think all was well with the world.

    You wonder when reality will set in?

    • VintageVNvet says:

      Location Location Location EK!!!
      Been there and done that in various upscale markets that were absolutely booming while the hoi polloi were suffering…
      Same thing clearly happening now from first hand reports from friends working in Tahoe area and Hawaii area saying they are booked out for years; ditto TPA bay area where, apparently, all the folks with huge incomes are moving to get away from the onerous income taxes some states levy…

  41. Paula G says:

    The next recession is driven by corporate credit and CRE. The Fed has just showed that the big banks are more resilient to credit risk and have lower exposure to CRE anyway. They will let the smaller banks fail as long as they can.
    This one is a white collar recession, which delays the indicators because these folks have a financial cushion. But they are also responsible for the largest share in consumption and spending, so the impact will be more severe.
    Boots on the ground- corporations have been through waves of layoffs already with no end in sight. But in the end big corps have a better chance to survive because they can still borrow.
    So the path will be different this time, it will take longer, but the outcome is the same. Soft landing is a fantasy.

  42. JimL says:

    This article is amazing in that it expresses my thoughts better than I could.

    The most amazing thing about it though is what it doesn’t say. Despite raising rates higher and faster than most of Wall Street ever expected, the FED still has not created a restrictive rate environment. It has not got out in front of inflation. It may not be super easy money, but it still isn’t tight.

    Anyone who reasonably wants to get a bank loan still can get a bank loan. Sure they might have to pay higher rates than they would like but they still could get it.

    I am old enough to remember when people applying for a loan had to compete with other potential borrowers for the loans. Banks had only so many capacity for loans so they picked and choosed who to loan to. A bad decision on a loan might not only mean a default, but there was also an opportunity cost. A bad loan was money that couldn’t be loaned to someone else.

    Many viable business ideas had to fight for capital.

    We are no where near that. Money is still closer to loose than tight.

  43. JimL says:

    The one nit I would pick with the article is that we have been in an easy money environment for longer than 15 years. At least going back to the mid-90s and Greenspan.

    During the housing bust monetary policy was still easy and loose. Anyone who reasonably wanted a loan could get one. What dropped back then was demand for loans because housing prices temporarily stopped rising.

    During the worst of the housing crisis though if you wanted to take out a mortgage on your paid off house, banks would trip all over themselves to loan you money. It was just that the temporary drop in valuations killed demand for mortgages. Lending was still loose, it was just banks had no one to lend to.

  44. Richard says:

    One of the things that resonated with me in your comments has to do with “experience”. I am in my early 60s, got into the business in 1982 when short term interest rates were in the high teens, the Volker days.
    Went through the explosive structural changes in the financial markets as a result of Reagonomics and the vicious market cycles that followed.
    You know what, I saw all of this coming, and you also know what, at my age, I am deemed irrelevant, and my knowledge and experience of no value.
    Those that don’t remember history are condemned to repeat it.

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